Indonesia's central bank may have room to reduce its benchmark interest rate to the lowest in almost two years as gains in the rupiah cool inflation, Governor Burhanuddin Abdullah said. Stocks rose to a record.

Bank Indonesia may be able to cut its policy rate to below the government's “working assumption” of 8.5 percent from 8.75 percent should inflation slow to the lower end of the bank's target, Abdullah said. The central bank is seeking to keep inflation within a range of 5 percent to 7 percent this year.

Abdullah said the rupiah's appreciation is “good” for the country, lowering the cost of the imported goods which account for up to 60 percent of the raw materials used to produce some Indonesian exports. The currency has gained as investors were attracted by the second-highest yield in the Asia-Pacific region and prospects of accelerating economic growth. If inflation slows “then the possibility of having the interest rate at below 8.5 percent is still possible, but we'll have to consider it from month to month,” Abdullah said in an interview in Dubai. There is also talk between the central bank and the Ministry of Finance to consider “8.5 percent as the average for the whole year. If that is the average, then we still have some more to do.”

The central bank's measure used as a reference for bill sales has averaged 9.17 percent this year. Consumer prices rose 6.3 percent in April from a year earlier, compared with 6.5 percent in March. ------------Getting better

Indonesia's benchmark interest rate is the highest in Asia-Pacific after Sri Lanka, which has a policy rate of 10.5 percent. Overseas investors held 71.33 trillion rupiah ($8.1 billion) of government bonds at the end of April, up from 63.62 trillion rupiah in March. “Foreign investors see the prospect of our economy getting better,” Bank Indonesia Deputy Governor Hartadi Sarwono told reporters in Jakarta on Wednesday. “The yield on assets in Indonesia, the central bank bills, bonds are still attractive.”

Reductions in borrowing costs have helped boost growth. Southeast Asia's largest economy expanded 6 percent in the first quarter from a year earlier, more than the 5.8 percent predicted by economists. Consumption expanded 4.5 percent in the three months ending March 31, the fastest pace in 10 quarters.

The government forecasts consumer spending will expand 5.9 percent in 2008 from an estimated 5.1 percent this year, Finance Minister Sri Mulyani Indrawati said at a briefing in Jakarta. The $351 billion economy is forecast to grow between 6.6 percent and 7 percent, she said. That would be the fastest pace since before the Asian financial crisis of 1997-98. ----------------Stronger currency

The rupiah has risen 3.1 percent this month, making it the best performing of 15 Asia-Pacific currencies tracked by Bloomberg. The measure, which rose as much as 0.3 percent on Wednesday, was down 0.1 percent to 8,810 against the U.S. dollar in Jakarta.

Bank Indonesia on May 9 said it was “comfortable” if the currency trades between 8,500 to 9,500 a dollar.

The benchmark stock index rose 1 percent to an all-time high as banks including PT Bank Rakyat Indonesia surged on expectation lower borrowing costs will boost earnings.

Still, the central bank needs to ensure inflation is under control before extending its policy of reducing the policy rate, said Robert Prior-Wandesforde, a Singapore-based economist at HSBC Holdings Plc. ---------------Growth priority “It seems that growth has taken priority over inflation,” Prior-Wandesforde said in a note to investors on Tuesday. “The trouble is, however, Indonesia won't be able to keep growth running at its current rate for long without a sizeable expansion in supply or a rise in inflation.”

The government wants to boost growth to cut poverty and add jobs before the next elections in 2009. The government expects unemployment to fall to 8 percent next year, Coordinating Minister for the Economy Boediono said.

The country's unemployment rate fell to 9.7 percent of the total workforce in February from 10.3 percent in August. “We are expecting the economy to perform better in the second quarter than the first quarter,” Abdullah said. “The economy is getting better and better.” (Source: Bloomberg)